Implications of market efficiency

The problem of algorithmically constructing prices which reflect all available information has been studied extensively in the field of computer science. For example, the complexity of finding the arbitrage opportunities in pair betting markets has been shown to be .

What market efficiency does not imply:

Efficient Market Hypothesis - EMH - Investopedia

The financial crisis has led , a prominent judge, University of Chicago law professor, and innovator in the field of Law and Economics, to back away from the hypothesis and express some degree of belief in . Posner accused some of his colleagues of being "asleep at the switch", saying that "the movement to deregulate the financial industry went too far by exaggerating the resilience—the self healing powers—of laissez-faire capitalism." Others, such as himself, said that the hypothesis held up well during the crisis and that the markets were a casualty of the recession, not the cause of it. Despite this, Fama has conceded that "poorly informed investors could theoretically lead the market astray" and that stock prices could become "somewhat irrational" as a result.

Financial market efficiency - Wikipedia

At the International Organization of Securities Commissions annual conference, held in June 2009, the hypothesis took center stage. , the chief economics commentator for the , dismissed the hypothesis as being a useless way to examine how markets function in reality. , managing director of , was less extreme in his criticism, saying that the hypothesis had not failed, but was "seriously flawed" in its neglect of human nature.

What is Efficient Market Theory? definition and meaning

Investors and researchers have disputed the efficient-market hypothesis both empirically and theoretically. attribute the imperfections in financial markets to a combination of such as , overreaction, representative bias, , and various other predictable human errors in reasoning and information processing. These have been researched by psychologists such as , , , and . These errors in reasoning lead most investors to avoid value stocks and buy at expensive prices, which allow those who reason correctly to profit from bargains in neglected and the selling of growth stocks.[]

The Efficient Markets Hypothesis - Marginal REVOLUTION

In strong-form efficiency, share prices reflect all information, public and private, and no one can earn excess returns. If there are legal barriers to private information becoming public, as with insider trading laws, strong-form efficiency is impossible, except in the case where the laws are universally ignored. To test for strong-form efficiency, a market needs to exist where investors cannot consistently earn excess returns over a long period of time. Even if some money managers are consistently observed to beat the market, no refutation even of strong-form efficiency follows: with hundreds of thousands of fund managers worldwide, even a normal distribution of returns (as efficiency predicts) should be expected to produce a few dozen "star" performers.

What is the efficient-market hypothesis? - Quora

The has led to renewed scrutiny and criticism of the hypothesis. Market strategist has stated flatly that the EMH is responsible for the current financial crisis, claiming that belief in the hypothesis caused financial leaders to have a "chronic underestimation of the dangers of asset bubbles breaking". Noted financial journalist blasted the theory, declaring "The upside of the current Great Recession is that it could drive a stake through the heart of the academic nostrum known as the efficient-market hypothesis." Former chairman chimed in, saying it's "clear that among the causes of the recent financial crisis was an unjustified faith in rational expectations [and] market efficiencies."

Efficient markets hypothesis - Wikinvest

Further empirical work has highlighted the impact transaction costs have on the concept of market efficiency, with much evidence suggesting that any anomalies pertaining to market inefficiencies are the result of a cost benefit analysis made by those willing to incur the cost of acquiring the valuable information in order to trade on it. Additionally the concept of liquidity is a critical component to capturing "inefficiencies" in tests for abnormal returns. Any test of this proposition faces the joint hypothesis problem, where it is impossible to ever test for market efficiency, since to do so requires the use of a measuring stick against which abnormal returns are compared —one cannot know if the market is efficient if one does not know if a model correctly stipulates the required rate of return. Consequently, a situation arises where either the asset pricing model is incorrect or the market is inefficient, but one has no way of knowing which is the case.[]

Efficient Market Hypothesis Lecture - YouTube

Proposition 2:The probability of finding an inefficiency in an asset market increases as the transactions and information cost of exploiting the inefficiency increases. The cost of collecting information and trading varies widely across markets and even across investments in the same markets. As these costs increase, it pays less and less to try to exploit these inefficiencies.

What is Efficient Market? definition and meaning

Speculative are an obvious anomaly, in that the market often appears to be driven by buyers operating on escalating / , who take little notice of underlying value. These bubbles are typically followed by an overreaction of frantic selling, allowing shrewd investors to buy stocks at bargain prices. Rational investors have difficulty profiting by irrational bubbles because, as , "Markets can stay irrational longer than you can stay solvent." Sudden market crashes as happened on are mysterious from the perspective of efficient markets, but allowed as a rare under the Weak-form of EMH.

Efficient Market Theory - The Strategic CFO

Empirical evidence has been mixed, but has generally not supported strong forms of the efficient-market hypothesis According to Dreman and Berry, in a 1995 paper, low P/E stocks have greater returns. In an earlier paper Dreman also refuted the assertion by Ray Ball that these higher returns could be attributed to higher , whose research had been accepted by efficient market theorists as explaining the anomaly in neat accordance with .